10th October 2019
Holiday Property the New Focus for Investors
The residential buy-to-let market has experienced a major downturn in recent years, largely due to tax implications for landlords, prompting investors to seek alternative options.
Investment in holiday property is the new focus for many. With input from an independent financial advisor, this article will explore why investors are turning to this growing market.
Why are investors turning away from residential buy-to-let properties?
The introduction of different taxes has made the buy-to-let industry less appealing. Landlords are taxed on their revenue, rather than on the profit after mortgage costs. The introduction of an extra 3 per cent stamp duty charge for property that is not the owner’s main home is another deterrent.
A further change introduced in 2016 prevents landlords from being able to reduce the income tax they pay on rental earnings by 10 per cent for ‘wear and tear’ to their property. Now, only the cost of replacing furniture or building work can be deducted.
The slowing down in the growth of house prices amid the uncertainty over Brexit has also been a factor in the decline of the residential buy-to let market.
Growth in appeal of holiday property lets
Twenty years ago, many of us went to travel agents to book holiday and leisure accommodation. Nowadays, consumers are using the speed and mobile accessibility of the internet to self-service their holidays, using websites such as Booking.com, Expedia and especially Airbnb.
Owners of holiday property have never found it easier to promote their properties for rental. Airbnb and other private booking sites for holiday property owners, together with social media, make it relatively easy for people to rent out their property.
Staycations - the term given to UK holidays – are gaining popularity. An increasing number of people are now choosing to take short breaks in the UK, with self-catering properties providing a big draw and growing year on year as a classification of holiday accommodation.
Also, whilst changes in taxation have hit the residential buy-to-let investors, HMRC allows very favourable rules for furnished holiday property lets and this is proving to be highly attractive.
An IFA’s advice to people who want to purchase a holiday property
Independent financial advisor Grant Hickton from Derbyshire-based Harvest Associates explains the process for those who wish to purchase holiday property as an investment. He says: “The key is to go through a financial planning fact find and assess a person's financial resources and then their own investment aspirations. Once I'm clear on this, I can point them towards options that best suit their requirements and respect their financial wherewithal.
“There are many financial investment products out there. The truth is, however, some of my clients come to me and pointedly ask me about the benefits and options involved in UK property investments.
“Again, my duty is to ensure they properly understand the practicalities and the risks involved in the opportunities they are looking at - so they progress all of their choices mindful of everything they really need to know.
“People shouldn't jump into any investment. They should get qualified advice from a registered financial advisor. They should also do their due diligence and homework on the provider of the properties and the legislation aspects.
“For example, is the company based in the UK, are they FCA registered, is there detailed documentation available to explain the investment, including any risks? These are just a few of the critical questions to ask.”
Aria Resorts investment programme
Aria Resorts offer a ‘hands off’ holiday property investment which provides investors with a fixed return over three or five years.
Research from a company called Second Estates shows that the Aria Resorts opportunity pays out close to 1 percent more per annum than what industry research says the returns are for holiday properties in the UK.
Hickton is very impressed with the package offered by Aria Resorts. “It’s not an investment that is suitable for all clients but I really like and respect Aria Resorts and their approach to business,” he says.
“In many years of being an IFA, they are the very first property-related firm that has approached Harvest Associates with an attitude and philosophy that centres around true respect for the investor and a total determination to be compliant with the UK legislation. They are the only type of company we would even consider working with - one that totally respects the legislation.
“They have professional and diligent people involved in advising them and these people know a huge amount about FCA compliance and the Financial Services & Markets Act that governs all investment distribution here in the UK.
“Their product is a holiday property purchase and the buyer or the investor sees their name attached as the owner of the property at the UK Land Registry. That's a very comforting part or their offering.”
Hickton adds: “Aria Resorts give qualifying buyers the option of taking on a three-year or five-year marketing agreement which, to all intents and purposes, is as close to an armchair investment as people could get.
“For this, Aria offers a 7 percent assured annual net return, with the monies paid out quarterly. This steady flow of regular income is important to some people.
“Another important factor is that Aria Resorts sell all of their investment property at a price governed by the Royal Institute of Chartered Surveyors, which means people can see they are paying a genuine price that is consistent with the real value of the asset.”
Modern building techniques embraced
Hickton points out that Aria Resorts are embracing modern building techniques and building to NHBC or equivalent standards, in a way that respects the green agenda that our planet desperately needs.
“We should all look to influence planet-friendly activities and remember that our children and grandchildren need to live on this planet in the years ahead,” he adds.
“We all know how important location is in property selection and strong yield and the parts of the UK that Aria Resorts is acquiring resorts match proven holiday hot spot demand.”
What sort of risks should people look for with a UK holiday property investment?
Hickton acknowledges that all investments do carry some level of risk, no matter how unlikely this is to come to fruition.
He commented: “Another aspect I liked about Aria Resorts is the very detailed Information Memorandum they’ve published and the tools they’ve created to support the investor. This lays out all of the essential information that people need to consider and this includes a robust risks section.
“They've even created an easy to use financial model that helps owners understand their potential returns outside of the marketing agreement. This is truly treating customers fairly through full and accurate information disclosure and the FCA insists on this.”
What is the level of risk involved in a UK holiday property investment?
Hickton admits that is a difficult question to answer and would need to be considered on many variables linked to an individual property or one sourced from and with a marketing agreement similar to the one offered by Aria Resorts.
He says: “Generally speaking, if people are buying a property that has been built to NHBC standards or equivalent, and they’re buying on a freehold or on a very long lease basis, the property is in an attractive and in-demand part of the UK and its properly insured and set to the rules of holiday rentals in the UK, it would be fair to say this sort of investment would definitely rank lower on the risk scale than some other types of investments.
“However, it does need detailed due diligence to take place on the specific operator - the company selling the property and any services they are offering alongside the sale. In light of various recent news stories, including the Woodford Investment fund, people are being more cautious in their investment choices and rightly so.”